OTTAWA (Reuters) - The next budget will likely show that Ottawa is cutting its deficit ahead of schedule and contain a sprinkling of targeted measures to bolster economic recovery, but the entire exercise could be moot as a possible election looms.
Finance Minister Jim Flaherty is scheduled to unveil the budget in Parliament on Tuesday at 4 p.m. ET. Investors will be watching for concrete measures that will save the minority Conservative government money without raising taxes or drastically cutting programs -- two approaches Flaherty has vowed to avoid.
Getting rid of the deficit earlier than the 2015-16 target date is seen as highly feasible because economic growth has sped up since the government forecast in October that this year's deficit would be C$45.4 billion ($45.7 billion), or about 3 percent of GDP.
But political pressure could tempt the government to use any fiscal wiggle room it has to sweeten the budget with social benefits demanded by the opposition, effectively ensuring its own survival.
"I'd agree that the government could cut the deficit down sooner than originally forecast. Growth is coming in strong, commodity prices are rising, which means more income and revenue receipts," said Sheryl King, chief economist at Banc of America-Merrill Lynch.
"This is going to be a political budget. It's more likely that they'll put out something that everyone can sign on to, which is the reason that I think it will be less austere," she said.
The government, led by Prime Minister Stephen Harper, has a minority of seats in Parliament, so it needs the support of at least one of the three opposition parties to pass key legislation like the budget and stay in power.
Polls show the Conservatives would easily win another minority and possibly a majority in an election, leading many to predict they're prepared to risk it.
For backing the budget, the Liberals are demanding a reversal of corporate tax cuts to finance social programs, an idea the Conservatives have ridiculed. The separatist Bloc Quebecois has a long and costly list of demands unlikely to be met.
That leaves the government's fate in the hands of the left-of-center New Democratic Party, which wants income support for poor seniors, more family doctors, improvements to the government pension plan and cheaper heating fuel.
If the budget fails to deliver, the opposition could unite to unseat the government and trigger an election in early May. Already incensed over a series of ethical breaches, they could also potentially vote the Conservatives out of office in another confidence motion as early as next week.
Canadian political risk is not a big worry for markets, analysts say, with attention focused on the Japanese disaster and unrest in North Africa and the Middle East. And while the deficit is a huge political issue in a country proud of its decade of surpluses before the financial crisis, it barely registers on a global radar preoccupied with the massive U.S. deficit and those in Europe.
"Markets are not looking at an election as a major concern ... I don't think an election would trigger a change in fiscal policy," said John Clinkard, chief economist for Canada at Deutsche Bank.
Additional reporting by Howaida Sorour; editing by Peter Galloway